Government must go all out to protect Semen Gresik deal<\/p>\n
Vincent Lingga, Senior Editor, The Jakarta Post, Jakarta<\/p>\n
The government should go all out to prevent the spin-off of
\nSemen Padang from the publicly listed Semen Gresik Group (SGG),
\nas demanded by a group with vested interests led by Semen Padang
\nmanagement, which claims to represent the aspirations of the West
\nSumatra people.<\/p>\n
Should the spin-off take place, the credibility of the whole
\nprivatization program, which is a core component of the nation's
\neconomic rehabilitation, could be destroyed, and foreign
\ninvestors would shun resource-rich West Sumatra.<\/p>\n
The group's arguments about the dignity of the Minangkabau
\npeople with regard to their ancestral land and its concerns about
\nthe risk of foreign cement companies abusing their market power
\nare entirely false.<\/p>\n
The group has been using the spin-off demands as ammunition to
\nblock the government from exercising its put option (the right to
\nsell its remaining 51 percent holding in SGG) with Mexico's
\nCemex, which now owns 25.5 percent of the company.<\/p>\n
The current management of Semen Padang and other rent seekers
\nof the vested-interest group are scared of losing their lucrative
\nbusiness if Cemex takes control of Semen Padang.<\/p>\n
The issue has nothing to do with anti-foreign investor
\nsentiment among the local people. The group's real objective is
\nto retain Semen Padang as a cash cow that its members can milk
\nany time they like.<\/p>\n
That is currently the status of Semen Padang because, despite
\nits acquisition by state-owned Semen Gresik in 1995, Semen Padang
\nremains an independent enterprise, with its own board of
\ndirectors and commissioners, having its own internal audit and
\nits own procurement and marketing system.<\/p>\n
No wonder that Semen Padang, which allegedly is ridden with
\ncollusion like many other state companies, is the worst performer
\namong the three cement units owned by SGG.<\/p>\n
The other two units are Semen Tonasa in S.Sulawesi and Semen
\nGresik in East Java. The three units together have a total
\ncapacity of more than 17 million metric tons.<\/p>\n
The SGG consolidated financial report for the year 2000 shows
\nthat Semen Padang lost Rp 46 billion, booked the lowest operating
\nprofit margin and suffered the lowest export prices. All this was
\ncaused by questionable practices in its marketing and procurement
\nsystems.<\/p>\n
The SGG annual shareholders meeting in Jakarta in June
\nreprimanded the management of Semen Padang for its gross
\ninefficiency, questionable pricing policies, poor marketing mix
\nstrategy and very poor communications and cooperation with the
\nother SGG members.<\/p>\n
Recent reports from media in Padang and Jakarta showed how
\nleaders of the spin-off team, who included not only Semen Padang
\ndirectors but some legislators and businesspeople close to the
\nWest Sumatra governor, had allegedly benefited either from
\nsupplying materials to Semen Padang, local marketing or exporting
\nSemen Padang products.<\/p>\n
The local people of West Sumatra, notably those in Lubuk
\nKilangan subdistrict where the Semen Padang industrial complex is
\nlocated, do not really care who owns the company so long as it
\ncreates maximum benefits for the local community.<\/p>\n
Statements by the Lubuk Kilangan community on various
\noccasions, the last one in late September, demanded only that
\nSemen Padang concentrate on recruiting locally, assist the
\ncommunity to establish a cement distribution company, implement
\nenvironment-friendly operations and contribute more to community
\ndevelopment.<\/p>\n
However, since the spin-off team is much better organized and
\nmore generously funded and able to meet with House leaders,
\nsenior officials and newspaper reporters in Jakarta, the voice of
\nthe vested-interest group has apparently been much louder.<\/p>\n
By forging ahead with its put option to sell its remaining 51
\npercent holding in SGG to Cemex, the government would generate
\nmultiple benefits for the three cement units and the whole
\neconomy as well.<\/p>\n
Among the immediate benefits would be:<\/p>\n
* The best selling price of around US$1.72 per share, or more
\nthan 275 percent of the current SGG share price on the Jakarta
\nstock exchange, bringing in about $520 million (Rp 5.2 trillion)
\nto the cash-starved government at negligible transaction cost.<\/p>\n
* Facilitating full integration of the three cement units that
\nshould have taken place in 1995 when Semen Gresik acquired Semen
\nTonasa in South Sulawesi and Semen Padang, but failed to
\nmaterialize until now due to opposition from Semen Padang
\nmanagement and some local leaders.<\/p>\n
The synergy resulting from the integration would create great
\nbenefits through much lower costs in financing, information-
\nsharing, elimination of redundancies in internal audits,
\nmanagement, local and export marketing and procurement.<\/p>\n
Most important of all is that the three cement companies would
\nbe fully subject to stock market regulations, especially those
\nregarding disclosure and audit standards, and compliance with the
\nprinciples of good corporate governance.<\/p>\n
* This landmark deal would kick start the process of regaining
\nforeign investor confidence in Indonesia at a time when the
\ncountry's risk premium is increasing due to local reaction to the
\nU.S.-led attacks on the alleged bastions of terrorism in
\nAfghanistan.<\/p>\n
However, succumbing to the demands for spin-off from the
\nvested-interest group would wipe out whatever remaining
\nconfidence foreign investors still had in the government's
\nprivatization program.<\/p>\n
Much more devastating would be the flagrant violation of stock
\nmarket regulations because the spin-off would almost certainly be
\nrejected by the minority shareholders (Cemex and the investing
\npublic, which holds 23.50 percent).<\/p>\n
Equally damaging would be the legal entanglements caused by
\nSGG commitments to its domestic and foreign creditors, who
\nobviously lent to SGG on the merits of its business plans that
\nwere based on the operational prospects of three cement units.<\/p>\n
Semen Padang had, as of last December, outstanding debts of Rp
\n617 billion to ABN Amro Bank and Rp 281 billion to state Bank
\nMandiri, entirely guaranteed by SGG.<\/p>\n
With a spin-off, Semen Padang would have to renegotiate its
\ndebts as a stand-alone company, obviously with a higher risk
\npremium, meaning that it would have to pay interest rates much
\nhigher than the current ones under the SGG corporate guarantee.<\/p>\n
An analyst concluded, after perusing the 2000 SGG annual
\nreport, that the higher interest rates alone would almost double
\nSemen Padang's interest expenses to Rp 70 billion, or nearly 40
\npercent of its operating income.<\/p>\n
No wonder that senior government officials have asserted that
\nthe Semen Gresik deal could make or break both the whole
\nprivatization program and the government's credibility,
\nespecially as the most promising candidates among state companies
\nfor privatization are resource-based enterprises that are located
\nin the provinces.<\/p>\n
Meanwhile, Cemex understandably does not wish to continue in
\nuncertainty. Indonesia is not the only place for cement
\ninvestment for Cemex, which owns and operates 66 cement plants
\nand almost 500 ready-mix concrete and aggregates plants in North
\nand South America, the Caribbean, Europe, Africa and Asia.<\/p>",
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"sponsor": "Okusi Associates",
"sponsor_url": "https:\/\/okusiassociates.com"
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